Interpretive Opinion No. 71 / 37F

State of California Department of Corporations

Anthony R. Pierno, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. Phillip F. Zeidman
Attorney at Law
Brownstein, Zeidman, Drew & Schomer
Suite 900
1025 Connecticut Avenue, N.W.
Washington, DC 20036

Dear Mr. Zeidman:

The request for an interpretive opinion contained in your letter dated April 19, 1971, has been considered by the Commissioner. Your letter raises the question whether the arrangements between International Mariners Association, Inc., a Maryland corporation ( "Association " ), and its Regional Directors, Account Officers, and Account Executives are "franchises" within the definition of Section 31005, and subject to the provisions of the Franchise Investment Law. Based on the assumptions stated below, this question is answered in the negative. As regards the arrangements between the Association and its franchisees also mentioned .below, you have advised that the offering will be registered in California pursuant to the Franchise Investment Law, and no question has been raised and none is considered in this opinion concerning these arrangements.

You have represented that the Association sells various goods and services to its members some of whom are boatowners. Each member receives a membership kit containing information on the Association's services, which include a marine insurance program underwritten by Travelers Insurance Company, discount catalogs for merchandise, navigational charts prepared upon request, boat inspection, a weekly publication, analyses of federal, state and local legislative programs relating to water pollution and control, and feature material of interest to boatowners The Association also organizes water safety patrols and training programs, and is interested in environmental problems.

You have further represented that the Association intends to sell memberships throughout the United States through a network of franchisees Account Officers and Account Executives, whose activities are to be supervised by the Regional Directors. You have represented that the Regional Directors, Account officers, and Account Executives are independent contractors, and that the Association enters into contracts with the Regional Directors but not with the Account Officers or Account Executives.

The Regional Directors represent the Association in designated geographical areas. There are to be 13 Regional Directors in California. They also inspect marinas, restaurants, boatels, etc., and determine whether they should be recommended to Association members. They do not purchase anything from or pay any fee to the Association for their appointment, nor do they sell or offer to sell any goods or services to franchisees, Account personnel or the public. For their services, they are paid a 5% commission on the suggested retail price of each kit sold by franchisees in their regions and 2-1/2% of each renewal fee paid in their regions.

The Account Officers and Account Executives are authorized to sell memberships and are entitled to profits realized on the sale of membership kits. They contract with the Association's franchisees who are engaged in the sale of memberships of the Association and who purchase membership kits from the Association which they may sell to the members enlisted by them or, as you state, at a wholesale price, to an Account Executive who in turn sells them to members whom he has enlisted. You have represented that the Account Officers and Account Executives pay no fee to the Association or to franchisees for the right to offer memberships, and we assume that no fee is payable by them to anyone for the right to carry on the activities described by you. They are not required to purchase any kits, but the franchisee may establish a quota of membership sales for its Account Officers and Account Executives. Failure to fulfill this quota may result in loss of the right to offer memberships.

Section 31005 defines "franchise" to include an agreement, either oral or written, between two or more persons, by which a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system. prescribed in substantial part by a franchisor, the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's commercial symbol, such as its trademark, and the franchisee is required to pay a franchise fee. Section 31011 defines "franchise fee" to mean any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any such payment for goods and services. The purchase or agreement to purchase goods at a bona fide wholesale price is not considered the payment of a "franchise fee" pursuant to Section 31011(a), and Rule 011 of the Commissioner exempts from the registration requirement of section 31110 of the Law, any offer or sale of a franchise which would be subject to registration solely because the franchisee purchases or agrees to purchase goods at a price other than the bona fide wholesale price, if the total payment in excess of the bona fide wholesale price computed on an annual basis, does not exceed $100.

Inasmuch as in accordance with the foregoing neither the Regional Directors, nor the Account Officers or Account Executives pay a fee for the right to engage in business and the plan of the Association, and based on the assumption that the price paid to franchisees by Account Officers and Account Executives for membership kits is the bona fide wholesale price, it is our opinion that, under the circumstances described in your letter, the arrangements between the Association and its Regional Directors, Account Officers and Account Executives are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law.

Dated: San Francisco California
July 23, 1971

By order of
ANTHONY R. PIERNO
Commissioner of Corporations

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HANS A. MATTES
Assistant Commissioner
Office of Policy